Introduction to Structured Warrants

Before investing in structured warrants, it is important that you read & understand

» what is a warrant
» what is a structured warrant
» the benefits and risks of investing in structured warrants

» the factors affecting the price of a structured warrant

Alternatively, you may wish to download a copy of the brochure on structured warrants for perusal.

What is a warrant?

A warrant is a security and a type of option.

A warrant gives the holder the right or choice to buy or sell a given quantity of the underlying asset at a pre-determined price (exercise or strike price), on or before the expiry date, depending on the exercise style of the warrant.

A call warrant gives the holder a right to buy the underlying asset while a put warrant gives the holder a right to sell the underlying asset at a predetermined price, on or before the expiry date, depending on the exercise style of the warrant.

Warrants have a fixed tenure and, if not exercised, are worthless after their expiry date.

What is a structured warrant?

A structured warrant is issued by a third party financial institution, on the shares of an unrelated company, a basket of companies' shares or an index.

	Call warrant	Put warrant
Scenario	When underlying share price rises above the warrant exercise price	When underlying share price falls below the warrant exercise price
Gain from a)Exercising the warrant	Difference between the current share price and the warrant exercise price	Difference between the warrant exercise price and the current share price
b)Selling the warrant	Difference between the prevailing warrant price and the warrant price paid by the investor. Warrant price would have increased with the rise in the share price	Difference between the prevailing warrant price and the warrant price paid by the investor. Warrant price would have increased with the fall in the share price

Note: The gain from exercising the warrant excludes the warrant price paid by the investor and the exercise expense.

Benefits of investing in structured warrants

In general, structured warrants offer the following benefits:

A warrant is usually priced at a fraction of the underlying share price. This allows you to trade more warrants than the underlying shares for the same investment outlay. Trading warrants therefore, offer benefits of gearing. For instance, a small percentage gain in the underlying share price may lead to a larger percentage gain in the value of a call warrant. Conversely, a fall in the price of the underlying share will lead to a larger percentage loss in the value of the call warrant.

Unlike warrants on individual stocks, index and basket warrants give you exposure to a sector or market, as their value are linked to the performance of a benchmark index and pre-defined basket of shares respectively. This eliminates the need of trading in a market portfolio of individual stocks.

The maximum potential loss to you is limited to the warrant price, which is usually a fraction of the share price. The potential gain of a warrant may be unlimited as it depends on the movements of the underlying share.

A put warrant allows you to hedge against a fall in the price of a stock in your portfolio. You are, therefore, assured of a minimum value equivalent to the exercise price for the stock in your portfolio.

Call warrants may be used to free up capital invested in shares. By selling existing share holdings and purchasing a corresponding number of call warrants for a fraction of the price, you can maintain exposure to the underlying share price increase while releasing capital from holding the shares.

Risks of investing in structured warrants

While SGX Securities Trading provides the infrastructure for warrants to be traded, neither SGX Securities Trading nor its subsidiaries in any way guarantee the performance of the warrant issuer or the warrants issued.

Credit risk is the risk that the warrant issuer will not be able to fulfill its obligations. This occurs during the exercise of the warrants. Therefore, you should assess the credit risk associated with the warrant issuer.

Liquidity risk occurs when a warrant holder is unable to sell his warrants for a reasonable price in the market. This is due to insufficient buy orders, which affects the market price of the warrants.

Similar to other investments in the securities market, the market value of a warrant is susceptible to events that affect its demand and supply. Hence, the market value of your investment will fluctuate accordingly.

In the event that a warrant is denominated in a currency other than Singapore dollars, you will be subject to exchange rate fluctuations that may have an adverse effect on the value, price or return of the warrant.

A warrant issuer who has committed to make a market in the warrants it issued may not fulfill its obligation due to unforeseen circumstances that may arise. Hence, you may experience liquidity risk despite a commitment from the warrant issuer to make a market.

Warrants have an expiry date and therefore a limited life. A warrant may expire before your expectations are realised, making it worthless. Therefore it is essential that you select a warrant that has sufficient time to expiry to match your market expectations.

The warrant issuer may declare a lapse of the warrant or bring forward the expiry date. This arises out of certain circumstances such as the delisting of the underlying asset. These circumstances are outlined in the Terms and Conditions of the warrants issue.

Factors affecting the price of a warrant

There are 6 main factors which determine the fair value of a structured warrant: the underlying asset price, the exercise price of the warrant, the volatility of the underlying asset price, the time to expiry of the warrant, the interest rate and the dividend of the underlying asset.

Brochure on structured warrants

For a more comprehensive explanation on the nature and risks of structured warrants, please refer to the Booklet on Understanding Structured Warrants.

Neither this document nor any information or opinion herein constitutes an offer, solicitation or invitation to make an offer to buy or sell any securities or any options, futures or other derivatives related to securities or any other financial instrument ("financial instruments"). SGX, its subsidiaries and their respective affiliates may deal in financial instruments in the usual course of their business, and may at any given time be on the opposite side of trades by investors and market participants.

This document is for general circulation and provides information of a general nature only. It does not have any regard to the specific investment objectives, financial situation or individual needs of any particular person receiving this document. Investors should seek advice from a professional financial adviser regarding investing in any financial instruments or adopting any investment strategies discussed in this document. The material in this document is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness assured. Examples are used for illustrative purposes only and do not constitute investment advice. Statements regarding future prospects may not be realised.

The value or price of, or income from, any financial instruments referred to in this document may fluctuate and may be affected by changes in exchange rates. Accordingly, investors may receive back an amount that is less than the amount originally invested, or may lose the entire principal amount invested. Past performance is not necessarily a guide to future performance. Any investments discussed herein may involve significant risk, may be illiquid and may not be suitable for all investors.